At the start of the 1980s, few of their peers would have envied the economic prospects of the “I” countries—India, Ireland and Israel. Yet, in less than a decade and a half, these countries joined the world’s leading software exporters. Though Ireland and Israel stumbled after the Internet bubble burst, they remain in the top ranks. How did these underdogs become tigers? As my colleagues and I explain, in a book with the same title, the three I’s have used different models. India’s success is based on the export of services, Ireland’s is mostly on multinational corporations (MNCs) attracted by low corporate profit tax rates, and Israel relied on high-tech start-ups, fuelled by large public investments in science and technology.
Yet, there are many common elements. Some are well known, for instance, large pools of engineering talent. These reflect longer-term investments. Israel has invested heavily in science and technology from the very start. While countries such as Portugal and Greece invested the EU transfers they received in the 1970s and 1980s in building roads and bridges, Ireland spent on universities and colleges—it has the largest percentage of student population in colleges, behind only Canada and the US. India too has spent heavily on engineering colleges, though much of this was private, not public.
The large pool of engineering talent also reflected the moribund economies of these countries during the ’70s and ’80s. Their economic misfortunes, however, had a silver lining. They were well positioned to take advantage of the big rise in IT demand in the ’90s, as work-stations (client-server) replaced mainframes, and later, the Internet revolution took hold.
Pasteur has famously remarked that fortune favours the prepared mind. These countries were fortunate but they succeeded because of their entrepreneurs. The success of Indian software firms is often dismissed by references to the abundant talent in India. Anyone who follows this sector knows that the pool is deep in talent but shallow in experience and skills. Leveraging this to service extremely sophisticated customers across the world is not easy. Indian software firms had to discover and evolve the right business model to make it work. Contrast this with the abysmal failure of the IT industry in eastern Europe. A big reason is the failure of entrepreneurs there to develop viable businesses that can leverage the abundant technical talent in countries such as Russia.
Another significant point is that leading firms are the nurseries for future managers. I venture that many leading Indian IT firms will spin off from the top IT firms of today, much as i-flex came from Citibank, Infosys from Patni and Ittiam from Texas Instruments. Other research at Carnegie Mellon confirms that leading regions in any industry are marked by the early presence of market leaders. Detroit became the motor capital of the world since Ford, Dodge and GM were located there, and Akron, the tyre capital, because of Goodyear. TCS, Wipro and Infosys have likely done the same for India and software services.
Where did the entrepreneurs come from? Literally, from all parts of India and from the extended Indian diaspora in America, as well. That a country where private enterprise had not meant much more than exploiting profit opportunities opened up by regulations could create so many entrepreneurs may tell us that governments in developing countries could rely upon private energies to develop the “high-tech” sector and focus on things that only governments can do—basic education, infrastructure, social services and the like. Ireland, too, had little history of high-tech industry. MNCs that came did little. But their local managers and engineers became an important source of high-tech start-ups such as Trintech, Iona and SmartForce. The Israeli software sector did benefit from public-sector R&D, but it benefited far more from venture capital and managerial talent from the US. An important common thread is that all three countries were open to the outside world and connected to their main markets by large diasporas. The diaspora supplied entrepreneurs and management talent in India and Israel. Of the Nasscom top 20 software exporters in 2006, five were founded by NRIs, and another four were spun off from MNCs. This does not even include exports by MNCs such as IBM, Kanbay, Syntell, Intelligroup and HP! A Carnegie Mellon survey of 66 Irish software firms found that over half the founders had either worked abroad or for an MNC. In Israel, while the technical talent was often homegrown, 40% of the publicly-traded software firms had top managers with US degrees. Missing in all this are the favourite policy prescriptions—creating clusters, encouraging venture capital, subsidizing R&D, or targeting specific industries for preferential treatment. There is little evidence that these policies made a substantial contribution in software export success. Yes, they didn’t hurt, but what really mattered were the basics—the supply of talent, connections to the main markets, and the freedom for entrepreneurs to experiment.
Ashish Arora is professor of economics and public policy, Carnegie Mellon University, Pittsburgh. Comments are welcome at firstname.lastname@example.org